The federal government recently relaxed its standards for hiring unpaid interns, but experts have differing opinions on whether the move will create a surge of summer hiring.

Specifically, the U.S. Department of Labor (DOL) scrapped an Obama-era test that required six criteria to be met before interns could go unpaid. In its place, the agency adopted a more flexible test favored by courts that allows stakeholders to look at the big picture. But will the shift set off an influx of unpaid interns? 

“There will definitely be an increase over the next couple years because companies, businesses, organizations, for-profit and not-for-profit employers scaled back on that, given the uncertainties and the aggressiveness of the Department of Labor in the past,” James Paul, a shareholder in Ogletree Deakins’ St. Louis office, told HR Dive. With a less-strict standard in place, many organizations will be confident they can meet that test, he said.

But others aren't as sure. “I don’t know that it will have a huge impact because many companies made adjustments over the last few years to either start paying interns or made adjustments so that it was clear that their programs tied into academics or career progression," said Chris Parlo, a partner at Morgan Lewis in New York. "A number of companies believe that by moving to a paid system they were enhancing their chances of getting more and better interns, so I’m not sure they will switch back."

Nancy Barnes, a partner in the Cleveland office of Thompson Hine, agreed. “The change in rules probably won’t have a specific, immediate impact because [many employers] have already started recruiting under the old system,” she said. And going forward, employers likely will be cautious before “jumping into the fray," Barnes said; while the new standard for determining when interns must be paid is more flexible than DOL’s previous test, employers received a lot of guidance under the old rules in the form of court cases and other interpretations.

Out with the old, in with the new

Unpaid internships exploded during the Great Recession, when employers cut wages and benefits to survive the economic downturn. But with that shift came both DOL enforcement actions and private litigation.

DOL adopted a six-factor test in 2010, and employers had to satisfy all six criteria to maintain an unpaid internship. Employers found one requirement – that they could derive no immediate advantage from the intern’s work – especially challenging.

Courts didn't take to the test, however. Several federal appeals courts – the 2nd, 6th, 9th and 11th Circuits – rejected DOL’s test, with the 9th Circuit joining as recently as December.

Just a few weeks later, DOL announced that it had updated its enforcement policies to align with that case law. The new test includes seven factors, and it's not an all-or-nothing concept; the criteria are designed to guide decisionmakers in examining the “economic reality” of the intern-employer relationship to determine which party is the “primary beneficiary” of the relationship, DOL said.

The new seven-factor test (spelled out in the Wage and Hour Division's Fact Sheet #71) asks courts to examine the economic reality of the intern-employer relationship to determine which party is the primary beneficiary. Courts have described the test as “flexible” and lacking a single determinative factor.

And while it's unclear whether this test will create drastic shifts in the workforce, it's possible that it will reshape the litigation employers have seen in recent years, Paul said. In the past, many of the legal actions involving intern complaints have been class or collective claims. Such legal actions are going to be more difficult to bring under the new standard because the seven factors are set up to be analyzed on a case-by-case basis, Paul said. “It’s going to be hard to throw them together."

Best practices

When it comes to hiring interns, employers have several factors they'll need to consider.

State and local laws

Employment law involves the interplay of federal, state and municipal laws. It’s important to comply with the FLSA, but employers also must check state and local laws for additional requirements.

It’s yet to be determined where a lot of states are going to land on unpaid interns because most states, including California, follow the old DOL regulations and the old test, Paul said. “We are assuming that most states, if not all the states, will fall in line. However, it is inevitable that – California might be most likely – a handful will probably create a new test or keep in place the old DOL test," he said. "The new administration is reeling back the progress the Obama administration made. Liberal blue states are going to continue to want to be progressive in this area,” Paul said.

Barnes agreed. It’s possible that there are jurisdictions where employers will have to comply with the new federal test and also meet the old federal test because it was adopted by a state, she said.

Maintaining unpaid internships

If an employer decides to take the unpaid route, it will be critical to document the relationship. Being clear that the intern and employer have agreed that the internship will be unpaid is always a “great thing to demonstrate,” Barnes said.

Communication is key, according to Paul. If the rules are laid out and the program can be shown to be more of value to the intern, rather than the organization, then it should be defensible as a proper legal, unpaid internship, he said. Employers need to make clear in the intern recruiting materials – flyers, job listings, applicant communication, on-campus recruiting events – what the ground rules are, what the program is, what it does do, what it doesn’t do. And all of that needs to be explained so that there is clear agreement between the employer and the intern, Paul said.

It's also a good idea to offer things that are tied into the academic or career progression of the intern, Parlo said; employers could hold resume writing classes and job interview workshops and sponsor other activities that tie the internship to skills that will help at school and in the intern’s career. In addition, have interns analyze what they're doing and provide feedback describing how the internship is helping in career goals, Parlo suggested.

Employers also could consider requiring academic approval from the intern’s educational program and limiting the duration of the internship to the summer or a semester, said Alison Crane, principal in the Chicago office of Jackson Lewis P.C.

Barnes agreed, noting that timing is a factor specifically noted in DOL's new test. If an internship started over the summer but continued into the academic year, that might suggest it isn’t really a learning opportunity, she said.

Interns can do some level of work, Crane said, “but, it shouldn't be work that displaces paid employees, and should still provide significant practical or educational benefits to the intern.”

Considering the costs

Rather than go the unpaid route, many find it more advisable to pay their interns, and attorneys often cite this as the only sure-fire way to avoid an FLSA lawsuit.

That might be a cost-effective solution, Barnes said; for an intern working part-time, the amount could be less than $200 a week, she said. That may well be a good option right now, Barnes said, “especially in the interim period when we are waiting to see how these rules are going to be interpreted.”